I am the Founder of Community of Liberty, a chapter based organization committed to pursuing the art of living in liberty, a member of the Publication Committee of the Claremont Review of Books, an Advisor to TheGold StandardNow.org, and a juror for the Bastiat Prize for Journalism. I have just published with my co-author Ralph Benko the booklet, "The 21st Century Gold Standard: For Prosperity, Security and Liberty," now available as a free download at AGoldenAge.com. I bring to my columns an extensive background in the investment management business, including my experience as an equity portfolio manager, strategist, president of my former firm’s retail sales and marketing subsidiary and member of the parent firm’s management committee. As such, I have been a student and observer of the political/economy and its affects on markets, businesses, and my own business for more than 30 years.

Why President Obama's Tax Hike Will Hurt the 98%

President Barack Obama’s campaign to raise tax rates on the top 2% will cause far more economic pain to the 98% than to the truly rich. First, the truly rich have already demonstrated their ability to avoid much of the Obama tax hikes. At the same time, the higher marginal tax rates he demands will reduce the opportunities for economic activity, leading to slower growth and fewer job opportunities for the 98%. Finally, those with high incomes inevitably will shift much of the burden of Obama tax hike to those with lower incomes.

Let’s start with the ruse that the truly rich (as opposed to those who may make more than $250,000 in a single year of their life) will pay a lot more. These individuals have many ways to avoid the now higher tax rates. The perfect case in point is Costco co-founder, director and former CEO Jim Sinegal. In a prime-time speech at the Democratic National Convention, Mr. Sinegal explained why he supported President Obama:

Business needs a president who has covered businesses’ backs. A president who understands what the private sector needs to succeed. A president who takes the long view and makes the tough decisions. And that’s why I am here tonight supporting President Obama, a president making an economy built to last. See, in order for companies like Costco to invest, grow, hire and flourish, the conditions have to be right. That requires something from all of us. (Emphasis added.)

Well, apparently all of us except Mr. Sinegal and his truly wealthy fellow Costco Board Members, who include such advocates for higher taxes as William Gates Sr. and Charles Munger.

Last Wednesday, Costco announced that it would borrow $3.5 billion so that it could pay a special dividend of $7 a share before the end of the year. Call it a six-year advance on the company’s current annual dividend of $1.10 per share. According to The Wall Street Journal, Mr. Sinegal owns two million shares, and will collect $14 million which will be taxed at the current 15% rate instead of the 43.4% rate called for by the President he supports. By paying out the dividend before year end, Mr. Sinegal alone will avoid paying $4 million in taxes to support all that he favored in his Convention speech: government funded education, innovation and research, affordable energy, safe and efficient transportation system, and, of course, paying down the government’s debt.

Talk is cheap. Paying taxes is expensive and worth avoiding — even by those who believe in government and “taxing the rich”.

The President’s claim that the 98% will not be hurt by a tax increase on “the rich” is at the heart of the great deception of liberal/progressive orthodoxy.

We normally think of taxes as being imposed on individuals or corporations. While true in the sense that individuals or corporations pay the tax, it also is misleading. A sales tax, for example, is paid by the merchant and charged to the customer, but it falls on the activity of the buying and selling of goods. No sale, no tax due.

In exactly the same way, income taxes are actually levied on the generation of income through market activities. And, market activities are always based on the discovery and execution of exchanges which make both parties better off. As Adam Smith explained in The Wealth of Nations:

Whoever offers to another a bargain of any kind, proposes to do this. Give me that which I want, and you shall have this which you want, is the meaning of every such offer; and it is in this manner that we obtain from one another the far greater part of those good offices which we stand in need of.

Income and sales taxes create an obstacle or barrier to such mutually beneficial exchanges by reducing what each party gets from the other. They are rightly considered tariffs, only they are imposed on trade among domestic participants instead of trade among participants on two sides of a political border. We all know that increasing tariff barriers leads to less international trade. In the same way, an increase in marginal tax rates leads to less domestic trade or economic activity.

Here’s why:

Think of an item that costs $100 that is suddenly subject to a 10% sales tax. Imposing the sales tax initially raises the price of the good to $110. When the price paid of a good goes up, the demand for that good goes down.

However, the price received is unlikely to remain at $100. At this price, the producer is willing to produce more than enough to meet the now lower demand. What happens next is never discussed by politicians, and mentioned only by a few pundits. Faced with less demand, the producer has to either produce less, or lower her price. If both the buyer and seller have equal responses to the change in price, then the tax will be split: the producer would lower her price to $95 – a price at which she is willing to produce less, and the buyer would face a price of $104.50 – a price at which demand now equals the lower supply.

How does raising tax rates on the affluent (and rich) hurt the working class? For an individual such as a contractor or gardener, taxi driver or hair stylist to take home $30,000 after tax, their non-business employers or customers would have to supply nearly $60,000 of goods or services in exchange! And, that is in a state with no income tax.

Here is how it works. To clear $30,000 after payroll and federal income taxes a married individual filing a joint return with no dependents has to be paid nearly $37,000 to cover $4921 in payroll taxes and $1779 in federal income taxes. But, to produce $37,000 net of the income (35%) and the Medicare payroll tax (2.9%), an individual in today’s top tax bracket has to earn an additional $59,581.

Under the President’s proposal, individuals earning $37,000 would see no increase in their taxes. But, the combined income/payroll tax rate on their customer would rise to 43.4% (39.6+3.8). That means, their customers would now have to earn $65,371 to net the $37,000, an increase of $5790, or 10%.

So, the contractors, gardeners and all others who provide services to the “2%” now face a double whammy. First, their customers have less money to spend after tax. And second, their pre-tax price just went up 10%. Like it or not, such a price increase on families with less disposable income will lead to a combination of less employment and lower wages for those who do business with the 2%.

Unlike the example of the sales tax above, much of the burden of the higher tax rates are likely to fall on those who provide services to the 2%. The family with an income of more than $250,000 may suffer the inconvenience of not upgrading their kitchen. But, the contractor loses all of the income that he would have earned, and the people he otherwise would have employed lose their jobs. Their ability to enter into mutually beneficial exchanges have also been impaired, leading to a further decline in income earning opportunities for the 98%.

Democratic folklore includes the myth that the Clinton tax increases led to the 1990s boom. In fact, the Clinton tax increase on those with incomes above $400,000 in 2012 dollars slowed the economic recovery that should have been gaining strength due to the end of the Cold War and the restoration of price stability for the first time since 1965. The Clinton boom was delayed until his second term when barriers to international and domestic trade were lowered by the reduction of tariffs under the North American Free Trade Act, welfare reform, and a cut in the capital gains tax rate.

“Tax the rich” may be a great slogan. But the consequences of the President’s economic policies will fall most heavily on those with modest incomes who will suffer the loss of jobs and promotions due to the shrinking opportunities for mutually beneficial exchanges.

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And don’t forget that this is just another way to shift the expense of our selfish spending to future generations…. While $250,000 may sound like a lot to many people (but not as many as you think), inflation alone will eventually put our decedents within that bracket.

I remember in my youth that I thought I’d be set if I could get a job paying $20,000 a year. Now I pay that much in taxes. (And no, I’m not one of the 1% or 2% or whatever the popular bullet point is right now. I’m not even 1 10% or 25%)

And also don’t forget that all you need is a 401k to be subject to the hits on dividends, interest and capital gains – people do realize their 401k contains shares of corporations, right?

Excellent article talk really is cheap another way people like the bailed out Warren Buffet and Gates get around taxes is charitable foundations. Buffet’s kids will make $90 Million a year running the ones he set up for them that’s pretty charitable to his kids that is…I wouldn’t mind nearly as much since I think taxes for all but a small gov. is theft but the hypocrisy makes me sick.

My personal conspiracy theory is that they want to pass this hike on 250k so that afterward they can print off 16 Trillion in dollars (Not based on anything anymore) pay off the debt with funny money while sky rocketing inflation so high that we’re all in the 250k bracket.

So… The 98% have all turned into workers for the 2%? Can these same contractors and gardeners be hired to build new schools and infrastructures for our great country to be able to maintain its status internationally. Lets not talk about hairdressers because we all know who spend the most on hair and they are not in the 2%. (LOL) However through education we can get them to stop mismanaging their funds to improve the quality of their lives thus the quality of the 2% who will not have to pay higher taxes when surrounded by more capable, educated and self dependent people. (most of the 98% are not ignorantly mismanaging their funds but are rather paying off school loans while tying to buy a home and educate their children which is not free because the public school system is terrible in the US ..I wonder why????)

If children from China and India have better educations they we do, what do you think will happen to America’s future? All we can think about is having more help( low paid almost servants) to do things that are not important for the whole. Most of the 98% don’t have jobs NOW that are adequate enough for basic survival in this country without the tax hike…so… what is your solution? A lot of help is not legal and are not paid very well anyway…But I digress. Lets assume everyone follows the rules when it comes to hiring help to make yourself all pretty as people literally starve and are miseducated. We need a solution that will help the 98% because if the 98% are taken care of, the 2% will automatically benefit, it is impossible for it to be the other way around. Just do the math.

The tax hike should be temporary. A good patriotic American would not mind sacrificing that extra rose bush, kitchen remodeling and a Mrs. Gingrich hair do to help out their fellow citizens. How can your argument be based on if the taxes are raised on the wealthy that they would have less disposable income to take care of superficial things because they support important trades. Lets discuss the teachers, the workers who make major cities run everyday that support the 98% who need to get to work or staff that run major public hospitals, the farmers, the people who work for us to have the bare necessities of life. Those are the people who need to remain employed. All else are luxury.

You state that these countries have a better education but at what cost? Children of these countrys are denied the simply pleasures of being children with increased hours of school and increased pressures. China has so many Children that increases the pressure to get into better schools. How is it fare to put that type of pressure on a child. In addition maybe you should look and see what the suicide rate is for Japan and China amongst Children and teens.

Is that really better? Of course we need education reform, its called disolving the Teachers union and start firing the ones that fail to meet basic standards instead of hiding behind a union. Democrates live in a false sense security. Enjoy ignorance its bliss!!

Companies hire people when they have to, when having fewer people is preventing the company from reaping profits. Lowering my personal tax rate, will not change that equation.

The reason that this is so is because workers are hired by companies for the most part, not individuals, including individual millionaires. They do pay their employees from their personal income after it has been taxed but from money taken the business income before it has been taxed. The way I have told it works best is for a business to take the gross income, pay expenses like salaries, supplies, rent and what not, set aside reserves for future investment (if possible) and from what is left, the net income, take personal income. In this manner, the wages of employees come out before corporate taxes and the personal taxes are paid, lowering the overall tax basis.

Here is a similar analysis from what you might consider a more reliable source, a fellow blogger here at Forbes.com.

Were I to own a gas station which was open 24/7, would need 21 8 hour shifts a week. I would need about five, perhaps six, employees to cover everything, including sick time. If I sell 1,000,000 gallons per week at 4.00 USD/g, then my weekly gross income is 4 MUSD. However I am purchasing the gasoline at 3.90 USD/g so I have only have only earned 100,000 USD that week. If I now subtract wages of my six employees who each work a 40 hour shift at 10 USD/hr that is 2,400 USD less or 97,600 USD. There are other expenses like electricity, workers compensation, and so forth so let us say the net business profit for the week is 90,000 USD, let us say 20,000 USD which would give me an annual income of just over 1 MUSD. From this I take my personal income and and by the maximum rate of 36%.

If my personal income tax rate were to be cut in half, how many new employees would I hire? None. Why? I am already selling as much gasoline as I can, adding additional workers would not result in any increase in sales. Further, adding additional workers will actually decrease my profits because the amount I pay in wages will go up but gross income will not. Cutting my personal income tax rate will just mean that I get to keep more of my personal income but it will not result in any increased employment. The same could be said of capital gains taxes.

This is the key point, lower the personal income tax rates on millionaires will not provide any benefits to society as a whole but will result in increased deficits for government.

My point is that wealthy individuals do not pay their employees out of their own personal income. A business will not hire more people than it needs to maximize profit and it will only hire as many people as it needs to to maximize profits. A business hires individuals when it needs to earn the maximum amount of profit, not because of the tax rates on the personal income of the owner.

As a member of the 2%, this is so true…We are calculating that our taxes will go up about 8K (over 10K of our Bush tax cuts are already lost to the AMT so we will not feel the 18K that we would have been hit with if we had been getting the full Bush tax cuts). Our extra money right now goes to pay for bi-weekly lawncare, a babysitter, tutor, and two music teachers… since so many other costs we have are already fixed and we don’t want to forego retirement contributions, we likely will have to stop most of these services to make up the difference. So while the government will get more money from us and we will have to take on more work around the house.. the real losers in this will be the teachers and other caregivers who lose all of their income from us… and the service providers and producers who lose their income because our service providers have less income.. There is a huge difference in what the 2% does with its money vs. the .05% in high cost areas like DC. In the alternative, my husband and I could actually reduce our taxes (and avoid all of Obama’s proposed top 2% tax increases) by getting a divorce. At that point we would each fall under his 200K per single cap and no longer be subject to AMT, expiration of the Bush Tax cuts for the top 2%, and the new 3.8% Obamacare tax. Most people don’t realize that the biggest loophole for couple with dual income is NOT BEING MARRIED.

After we fall over the, so called, ” Fiscal Cliff,” we could go back to the 50′s when the wealthiest were paying 91% over $200,000. We will only be affected by the most greedy of the 1%. People like Poppa John, who would give away 2,000,000 pizzas but reduce the hours of his employees in order to avoid ObamaCare. Explain to me the logic in that

In 1958, the 91% tax bracket took effect on incomes over $400,000. The CPI has increased 10-fold since then. So, the equivalent today would be to impose a 91% tax rate on incomes above $4 million.

In addition, the tax law then was full of loopholes easily used by those with high incomes to shelter a significant portion of their income. As a result, in 1958, those with the highest incomes paid a smaller share of total income taxes, and those with middle incomes paid a higher share of total income taxes than they do under today’s lower tax rates.

We are on a progressive tax system that which should increase accordingly when income is increased. This is the system for most tax payers below around $300,000 AGI and its what keeps the money flowing back to the rich people. If the funds are not being fairly circulated then eventually the poor will be so poor they cannot afford to pay for goods/services provided by the wealthy business owner. Bill Gate in an interview even agreed that ‘the wealthy’ part population are not paying there fair share and getting away with paying nearly no taxes. All that uncollected money, if collected properly would clear our nations deficit withing the first couple years. The ‘rich’ will get richer and the poor will become poverty stricken which will in the long run be a downfall for those money hoarders. Its just disgusting how greedy people are who have everything want everyone else to suffer and that’s wrong as well as some ‘ideas’ in this article. So the research take a University econ. course or two (dig deep; from view points of many), and then tell me its that way. For the short-run and long-run.